ICICI Direct recommended hold rating on Apollo Tyres with a target price of Rs 100 in its research report dated May 20, 2020.
ICICI Direct's research report on Apollo Tyres
Apollo Tyres (ATL) reported a healthy operational performance in Q4FY20. Total consolidated operating income came in at Rs 3,610 crore, down 15.5% YoY (APMEA i.e. largely India revenues down 20.5% YoY to Rs 2,474 crore, Europe revenues down 3.8% YoY to Rs 1,164 crore). EBITDA was at Rs 475 crore (up 11.9% YoY) with attendant EBITDA margins at 13.2% (up 110 bps QoQ). The sequential margin improvement was on account of a substantial 360 bps drop in raw material costs. Negative operating leverage, however, led to a rise in both employee costs as well as other expenses. Consequent PAT came in at Rs 78, supported by deferral tax gains of Rs 38 crore.
We expect sales, PAT CAGR at 2.3%, 0.9%, respectively, in FY20-22E. Despite likely benefits on margins front, the large net debt on books (~Rs 6,000 crore as of FY20P) and expected gradual nature of demand revival are seen inhibiting returns to double digit return ratios. Hence, we maintain HOLD on ATL, valuing it at Rs 100 i.e. 4.5x EV/EBITDA on FY22E numbers.
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